Tata Motors earnings surprise, but here is one number JLR may not sustain

Shares of Tata Motors, India’s biggest automaker by revenue, jumped more than six percent after strong sales of its luxury Jaguar and Land Rover vehicles helped triple the company’s first-quarter net profit.

Jaguar’s and Land Rover’s retail sales during April-June rose 22 percent to 115,596 units from a year ago, while sales of its domestic trucks, buses and passenger vehicles declined by 28 percent to 110,612 units.

Operating margins at its JLR business rose to 20.3 percent from 15.8 percent a year ago, while margins at its Indian business fell to minus 2.8 percent from 2.3 percent a year ago.

Tata Motors’ consolidated net profit rose to Rs 5,398 crore, the highest in nine quarters, compared with Rs 1,726 crore a year ago, Reuters reported.

Consolidated revenue rose 38.2 percent to Rs 64,683 crore.

Brokerages are upbeat about the company after the more-than-estimated earnings, but there is one number that many of them suspect whether the company will be able to sustain: the EBITDA margin or the operating margin.

Brokerage Kim Eng, which has a buy rating on the stock and a target prices of Rs 550, has said that the earnings per share of Rs 16 was way above its estimates. “This is unusually high and is likely to trigger upward revisions in Street EPS forecast for FY15,” it said.

However, it stopped short of revising the EPS forecast yet as it expects “the unusually strong EBITDA margin at JLR to soften in subsequent quarters”.

It expects new launches by JLR in 2015 and opening of new plants in China, Brazil to act as catalysts for the company’s growth.

According to ICICI Securities, it was the “surprisingly lower” other expenses at 811 million pounds that helped the company in April-June. The EBITDA margin has also beat the estimates.

“JLR’s strong 20 percent EBITDA margin translated into 17.2 percent at the consolidated level, resulting in a PAT of Rs 5,400 crore, which is significantly higher than expectations,” it said. However, it has doubts whether the company will be able to retain these margins “given the past volatility in JLR margins and seasonality in product mix”.

The fact that JLR had cut prices of certain models in China by 10 percent in July is only adding to the suspicion. Moreover, the brokerage feels it is unlikely that the company will be able to maintain other expenses at such low levels given the significant component of forex in it. The pound’s movements have been unfavourable for JLR, which will also have a negative impact on margins.

However, reduced price in China is likely to boost the sales volume, which is likely to make good for the decline in realisations, the brokerage has said, which upgraded the stock to buy. It also sees a pick-up in sentiment in the Indian medium and heavy commercial vehicle industry, where the company dominates in India.

With inputs from Reuters